Distribution of Dividends in a Malta Company
The shareholders of a company expect to reap regular financial benefits from their investment in the Company, and one of the roles of the directors is to ensure the maximisation of profits. The profits shall then be remitted to the shareholders in the form of dividends. Article 192(1) of the Companies Act prescibes that a company must not make a distribution except out of the profits available for distribution. Distribution may be in a number of manners, notably the following:
Company assets, whether in cash or otherwise;
The redemption and purchase of any of the company’s own shares out of capital, including the proceeds of any fresh issue of shares out of the undistributable reserves of the company;
The reduction of the issued share capital by extinguishing and reducing the liability of any of the members on any of the company’s shares in respect of issued share capital not paid up, or by paying off paid up issued share capital; and
a distribution of assets to members of the company on its winding up.
It follows that the only profits available for distribution are the company’s accumulated, realised profits, so far as they are not previously utilised by distribution or capitalisation, less any accumulated, realised losses. However, although the company may have accumulated, realised profits, it is under no obligation to distribute all of its profits to its shareholders. It is in fact customary to allow the accumulation of funds in a reserve, and this is to allow the company margin for investment, new expenditure and a contingency for penalties and fines which may accrue. The size and proportion of this reserves may be set forth in the Companies Act. However, it is typically left at the discretion of the directors, since they are the persons entrusted to the day to day management of the company, and with the taking of financial decisions.
Divdends are, barring any provision to the contrary that may be included in the Memorandum and Articles of Association of the Company, be payable only if and when an authorised organ of the company declares them to be so. It is common for the articles to provdie that the dividends are to be declared by a resolution passed at a general meeting but that no dividends shall exceed the amount recommended by the directors. It is however not uncommon for the directors to be given the power to declare dividends as well, or to the exclusion, of the general meeting. If there is no express provison in the Memorandum and Articles of Association, then the presumption shall be that such power shall lie with the directors of the company.
Dividends are usually declared at the company’s annual general meeting or by way of interim dividends. The payment of dividends has an intrinsic connection with the tax refund that apply to a Maltese company. The Maltese tax system is a credit imputation one, whereby the company pays a corproate tax rate of thirty-five percent (35%), but the shareholders shall be entitled to a number of tax refunds. This makes Maltese companies particularly tax efficient tax vehicles, ensuring that the ultimate tax leakage on active trading income is of five percent (5%) or less. The aforesaid tax refund is only possible for final distribution of dividends (in other words not possible for interim dividends).
This distinction is of major importance, and the cornerstone of the Maltese tax treatment. Another significant distinction between final and interim dividends is that when a final dividend is declared, it is irrevocable and becomes a debt payable due by the Company to the shareholders. Interim dividends on the other hands may be rescinded, varied or revoked any time before such dividend is paid. It is important, whenever interim dividends are declared, that the company always retains a contigency for tax liabilities, as this taxation shall be payable by the company at the end of the accounting reference period. The directors should ensure that this contingency is generous enough to include any foreseeable tax liabilities and any forseeable costs that may be undertaken by the company.
Dividends are generally payable to the persons who are registered in the registry of members or who are the bearers of its share warrants, on the date when the dividend is declared, unless provision to the contrary is set forth in the articles of association. The payment in respect of shares registered in the registry of members is effected to the person so registered on the date when the dividend is declared. Because of the aforesaid tax imputation, it is important to register the shareholder of the Maltese Company also with the Maltese tax authorities and to furnish evidence of such approval and amount of dividends (through dividend warrants) in order for the shareholders to be entitlted to a tax refund.
The distribution of dividends is therefore a matter of considerable scope and gravity with corporate and fiscal consequences. Article 204 of the Companies Act prescribes that if a distribution is effected at a time when the company has insufficient profits, any shareholder who had knowledge of the precarity of the financial situation of the company, or who ought to have knowledge thereof, then he is liable to repay the distribution received to the company. Furthermore, if distribution was made for matters otherwise than in cash, such member would be liable to pay the company a sum equal to the value of the distribution, at that time. This principle is enforced by the need of the company to have capital maintenance, and to protect the interest of creditors, who may otherwise have their credit jeopardised by such wrongful distribution.
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